It was Walter — not Wayne — Gretzky who coined the maxim, “Skate to where the puck is going, not where it has been.”
People who write about markets are absolutely enamored with Walter’s pithy aphorism. From sell-side analyst notes to buy-side letters to Substack posts, the hockey puck dictum’s ubiquitous. Traders — God bless ’em — hold it up like some sort of commandment and regard it with the sort of reverence the better-educated reserve for especially weighty passages in the Meditations.
I’m not much for Walter’s axiom myself, particularly in the market context, because it’s tantamount to saying, “Know the future and front-run it.” That would indeed be a good strategy. But you’ll have better luck sourcing a Mogwai (or a mint condition Chrome Hearts Flarenie Gunslinger backpack) than you will locating a working crystal ball. So I’m not sure how useful Walter’s wisdom really is.
But that’s the “biz,” right? The macro-market biz, I mean. It’s about predicting the future and getting paid four, five, six or forty times the median household income to be wrong seven or eight times out of 10. If you’re a trader, an old rule says the only surer way to move up in the world than being consistently right is to blow up huge — lose $15 million and your career’s over, but lose $15 billion… well, then you’re really going places.
Anyway, BofA’s Michael Hartnett has a pretty good idea about the future, and specifically about what he calls “the next great rotations.” “We say the next secular leaders are emerging market and small-cap stocks,” he wrote, in this week’s installment of his popular “Flow Show” series.
He focused specifically on the nascent underperformance of US large-cap growth to small-cap value, which he explained using a by-now-familiar list of socioeconomic shifts: “[From] elitism to populism, capitalism to socialism, services to manufacturing and globalization to isolationism.” Those transitions favor “small-caps on Main Street not large-caps on Wall Street,” Hartnett said.
The figure on the left, below, gives you a sense of where we’ve been and, more to the point, how much room there is for this fledgling rotation to run if Hartnett’s right.
The figure on the right gives you the same context for the EM-over-US trade. That ratio — emerging market equities to US stocks — hit a 50-year record low not so long ago.
“[A] new world order equals a new world bull [as] US exceptionalism flips to global rebalancing [and] US ‘run it hot’ policy means a new ‘Anything But Dollar’ trade,” Hartnett wrote, explaining the rationale for the EM call. The leader in this new world will be “international stocks, and especially” emerging market equities as “AI devours commodities and EMs produce them.”
I don’t “disagree” with Hartnett, as such. But it’s very hard (and I’ve tried recently) to get psychologically comfortable with investing a lot of money in small companies, most of which I’ve never heard of, in a world where more or less everything we do is mediated by five or 10 giant, publicly-traded firms which, together, define our very existence.
As far emerging market equities, the problem there’s always the same: You’re taking idiosyncratic risk that you almost invariably don’t understand because understanding means engaging in a serious way with local politics in a dizzying array of relative backwaters. And that’s to say nothing of the fact that the most readily-investible EM benchmarks still have a lot of exposure to H-shares, which is to say they’re vulnerable to the (often cruel) vagaries of Party machinations in Beijing.
If you ask me (and I use “ask” informally, because this isn’t investment nor financial advice), the ambiguity and thereby stress associated with a small- and mid-cap allocation larger than 15% isn’t worth it. I’d say the same thing about an EM allocation only I personally use 20% as the threshold there. That leaves up to a third of my overall equity allocation to non-large-cap DM stocks and EM shares, which has always been (more than) enough for me.
Of course, I could be wrong. After all, I don’t have a crystal ball.
Been on a bag/backpack kick recently?
Yes. I’m on accessories in 2026.
No gold, gold miners, gold covered call options funds?
That’s a fact. Story time!
I started as a trader on the real-time desk of a Houston-based IPP back during the Enron era. The Director of the asset desk (where “asset” means ginormous combined-cycle power plants–they were all the rage back then) had famously blown up when he was trading short-dated Northeast power swaps. He was short NEPOOL for size when something he failed to predict happened: planet Earth took a direct hit from a huge solar CME. The further North you go, the less protected by the Earth’s magnetic field you are. The magnetic flux from the CME caused voltage spikes on New England power lines causing e NEPOOL’s automated self-preservation mechanics to trip.
NEPOOL didn’t have a cap on power prices back then. Automated dispatch immediately shot to $10,000. In the blink of an eye, Andrew lost $56 million. Naturally, he was promoted.
Today he’s the CEO of Calpine. Seriously. He’s on the Wikipedia page. For some reason though, they don’t mention the NEPOOL blowup in his bio.
It’s so true. The only way to get fired forever in this industry is to lose small. That’s the worst kind of person on Wall Street: “Small loser.” “Huge loser”‘s just barely below “huge winner” on the list of resume builders. I’d go so far as to say “huge loser” is marginally better than “big winner.” Whatever you’re going to do, it’s gotta be “huge.” “Big” is the bare minimum.
“‘Extra strength’ is the absolute minimum. You can’t even get ‘strength’,’ ‘strength’ it out now” —> https://www.youtube.com/watch?v=3-T8BRRM30w
I don’t believe these are market rotations. More like news reporters, attached to hedge funds, are blasting scary headlines based on fear, not facts, to make money on their capital. “Journalists” are figuring out how to monetize their writing skills/investigative reporting.
With smaller caps, it is back to basics. Better be extremely detailed and know how to do fundamental and market research on your investments. Put on blinders to sell side analysts and “shorts”.
I have been investing in the same small cap for over a 13 year period. That stock has increased in market cap over that time period from about $10B market cap in 2013 to its current market cap of $40B. Lots of volatility, but I know when it’s time to go overweight and when it is time to lighten up. Maybe I’m off by a quarter or two, but I’m confident in the long term.
Twelve percent of my total investment portfolio is in smaller private equities overseen by professional BDC managers. A bit more is in small cap equity funds. All of this pays me a cash distribution equal to 16% of my investment income. This pile doesn’t generate much growth because I’m 81 and don’t care about growth. Unless it’s realized soon I’ll be dead before it’s worth anything. The small caps I have earn 9-10% in cash annually. My IG bonds earn 6.5 -7.5%, mostly tax free. Unlike SeaTurtle I haven’t B for Billions, But I reinvest 15-25% of everything I make and realize steady continuous growth in both assets and income. I don’t even know what my total income is. I set no goals for that metric. Oh, and no losses this century.
Nice!
I am currently around 70% small and medium caps and have been for years and I am comfortable with that. To do this, I look at it as buying businesses not stocks (not to get all Warren Buffety on you). I have no advantage buying large and larger medium cap stocks because the people with money have analyzed them to death. Small caps with floats too small for the big guys is where I have been most successful, but it is a lot of work, and you have to have a bunch of them because some won’t work out. The small float makes for volatile stock prices meaning you just wait around to buy and hope you got it right because that can also make it hard to get out. Having previously owned my own small businesses I am sort of mentally prepared for the problems.
I mostly avoid foreign stocks other than Canada or the UK because I don’t understand the regulatory environment.
My retirement IRA and 401(k) was actually funded to a large extent by small cap banks in the 2008-2009 period. The FDIC would announce a bank had insufficient capital and the stock would plunge to 40 or 50 cents a share and I would buy around 40,000 shares. Then like clockwork, before they would be delisted, the bank would come out with a statement that they were making progress on their capital requirements and the stock would shoot up to 2, 3, even 4 dollars a share and of course, I would exit. I did this over and over until the crisis more or less dissipated and being in tax deferred accounts, I didn’t have to pay capital gains taxes. This of course isn’t what I would call investing, but it does show that you only have to be right a couple times while avoiding any serious mistakes.
I have moved money into sound dividend paying companies, IG corporate bonds, foreign DM stocks, and short-term treasuries for now. I have lost money on EM stocks in the past, and I am not comfortable investing in China in the midst of a trade war and a potential currency war. I should add that I am retired now, and income and the preservation of capital are my main concerns. We have had a nice three-year run, but things really seem to be changing now.
Completely agree. I am a Brit living in rural England and I only invest in the USA because there is so much choice, so much analysis, so many technicals, so much available macro and micro info and data. You’re flying in the dark in Europe, ME and Asia. The uk market has done well over the last six months but nothing really over 27 years!! Locals are thrilled but the money could leave these non US markets in an instant and that would be it, finito, sayonara, Auf wiedersen, zaijian.
That is 100% correct. It is how all the rich hedge fund managers got there in the 70s.
I swim to a large extent in the Canadian small and medium size pool, which I know well. The pool itself. Is relatively small so you get to know the players.The TSX has been correlated to some extent to emerging markets If you know the market and focus on the prudent high growth companies, you can do well, including besting the S&P 500.